Internet of Things changing way we interact with the modern world
Innovation in the digital technology space has changed the way people and companies interact with the world. As the number of mobile-enabled devices increases and companies aggregate and analyze more and more data, this level of innovation will accelerate further. In 2010, the number of computers on the Internet exceeded the global population1, driving increased interaction with Internet-enabled devices. This trend has continued to compound in recent years. As a result, the entire paradigm of how we interact with the Internet and the modern world will drastically change – driving the establishment and rampant adoption of the Internet of Things (IoT). A recent Gartner report found that 43% of enterprises plan to adopt IoT into their business models, which is expected to increase to 64% after this year2.
IoT is growing rapidly, with smart homes a major application area
IoT is rapidly evolving a number of industries traditionally untouched by the Internet, with the overall market projected to grow to $7.1 trillion by 20203. One of the main applications of IoT is for smart homes4, which is the second biggest area of IoT adoption behind smart energy5. Users can now lock their front door from their office, and can configure their residential security system from the road. With the recent mandate in 2014 to stop production of incandescent light bulbs6, smart light bulbs have surfaced as one of the interesting applications of IoT within the smart home segment.
Phillips is one company that has adopted IoT in its light bulb business
One company at the frontier of IoT adoption in the light bulb industry is Phillips. The recent regulatory changes, coupled with the advent of smart home devices, led Phillips to create a new product of light bulbs that leverages smart technology. These new light bulbs provide a considerably differentiated product for its customers. With the technology-enabled Phillips Hue, users can control lights remotely from their mobile device and can set schedules for when lights should turn on or off. The product also allows for automated dimming7.
In addition, you can customize the color, intensity, and brightness for each bulb, allowing users to get creative for different rooms. All of this can be done from a mobile device. It’s also integrated with Amazon’s new smart home device, Alexa. This creates a more interconnected smart home ecosystem, increasing overall convenience for smart home advocates as they can use Alexa to control lights as well. Finally, these light bulbs are more energy efficient than traditional light bulbs, driving considerable cost savings for the customer7.
Switch to smart light bulbs evolves business model for Phillips
This new product represents a deviation from Phillips’ previous business and monetization model for light bulbs. The light bulb business model is similar to that of the razor-razorblade model, where a user has an upfront device cost (the razor) and then an ongoing variable cost based on usage (water and blades in this example). In the light bulb model, the user also has some semblance of fixed and variable costs (the device itself and the energy it uses). While previous versions of light bulbs had a considerably lower upfront purchase cost, they were less efficient overall, leading to higher monthly energy payments to use the light bulbs (the variable costs).
In this model, Phillips offers a superior, differentiated product at a drastically higher fixed cost, but the design of the light bulb is such that the ongoing energy costs are considerably lower. While Philips does not directly receive the payment for energy usage, their pivot to this new product line will lead to them getting a greater share of consumer spending overall in this segment. In addition, these light bulbs have a considerably greater lifetime, offering a vastly different value proposition than their previous light bulb solutions, as they will now need to be replaced far less often.
Phillips should continue to invest in smart home integration & bulb technology
To continue the success of the product line, the company should continue to build out integrations with other IoT products, similar to what they’ve done with Alexa. Users are keen on convenience in this market, and integrating across multiple smart home devices would allow the Hue to become a stickier product in people’s homes. I also think the company should continue investing in the technology of the bulbs to innovate further and drive down cost. Right now, the light bulbs are very expensive, so if they can drive down the price of the product through innovation and R&D investment, they could yield far greater adoption. Overall, the company has done a good job of staying at the forefront of the IoT trend by adding a highly differentiated product for its customers, helping drive toward a ‘smarter’ world. (799 words).
1”As Objects Go Online: The Promise (and Pitfalls) of the Internet of Things”, Foreign Affairs, 2014 http://heinonline.org/HOL/LandingPage?handle=hein.journals/fora93&div=39&id=&page, accessed November 2016.
2Gartner survey shows that 43 percent of organizations are using or plan to implement the Internet of Things by 2016”, BusinessWire, March 3rd 2016 http://www.businesswire.com/news/home/20160303005220/en/Gartner-Survey-Shows-43-Percent-Organizations-Plan, accessed November 2016.
3”Internet of Things: Technology and Value Added”, March 2015 http://search.proquest.com/openview/ac6643ce2897d57bbad03f45ba9436e1/1.pdf?pq-origsite=gscholar&cbl=816386, accessed November 2016.
4”The Research and Implement of smart home system based on Internet of Things”, IEEE, September 2011, http://ieeexplore.ieee.org/document/6066672/, accessed November 2016.
5”A Survey of Internet of Things from Industrial Markets Perspective”, IEEE, January 2015 http://ieeexplore.ieee.org/stamp/stamp.jsp?arnumber=7004894, accessed November 2016.
6Wolf, Michael, “5 Smart Home Companies to Watch in 2014,” Forbes, December 31st 2013, http://www.forbes.com/sites/michaelwolf/2013/12/31/5-smart-home-companies-to-watch-in-2014/#ddb3cca1ebe9, accessed November 2016.
7Phillips Hue product overview and specifications http://www2.meethue.com/en-us/productdetail/philips-hue-white-sk-a19#overview, accessed November 2016.